Govt well on its way to wiping out an entire industrial sector
‘With no restoration of stability and sanity to economic policy, the listed construction sector could go to zero’
Last Wednesday, the day that Murray & Roberts (M&R) announced that it would no longer pursue its bid for construction and engineering group Aveng, the heavily indebted Aveng’s share price was rooted at 8c a share. That is a far cry from its all-time high of R72.92 in 2008.
M&R’s decision to walk away from the proposed R1bn transaction was a blow to troubled Aveng’s future prospects. The deal was a glimmer of hope for Aveng, which is sitting on a R3.25bn pile of debt. The group has said that, at current levels, its debt was unsustainable.
The combination with M&R could have been Aveng’s ticket out of misery. Aveng has said that its share price was undervalued. Its value could be enhanced by better performance by its underground and surface mining business, Moolman’s, and McConnell Dowell, the engineering, construction and maintenance contractor, as well as the disposal of Aveng Grinaker-LTA and Aveng Trident Steel.These days Aveng, the company that built the iconic FNB Stadium, is a shadow of its former self. It closed 12.5% lower on the day at 7c a share on Monday.
To an extent Aveng’s current misfortunes are a reflection of how much the construction sector has lost its shine in the past decade, transforming from a key sector that used to keep SA’s economy running to one that is on its knees. In SA, the sector is bracing itself for a muted infrastructure and industrial market in the medium term.
Contacted for comment on M&R’s latest decision, some analysts said they had stopped following construction stocks because the sector’s future shape and form remain uncertain. In fact some said the sector was not worth their while for as long as the industry’s prospects looked dim in a low growth environment.
Vestact Asset Management portfolio manager Byron Lotter said the firm did not cover any construction stocks. “It is too cyclical. It is a feast or famine industry. We prefer to hold stocks for longer periods, instead of jumping in and out.”Lotter said Vestact would not find construction attractive even if the sector recovered immensely. “It would be great for the country if construction recovered but it will not change anything for us.” The firm’s focus was on technology, health and retail, three sectors that offered relative stability.
Warwick Lucas, chief investment officer at Galileo Asset Managers, said there was deep value in some listed construction stocks. But he said it was not immediately clear what would trigger a rebound for the industry because the recovery off the 2016 lows was shallow and slow.
“One therefore has to take a view to invest despite the lack of decent news out there. The sector is so small now that an institution would have no meaningful chance to get in after any good news.”
The only investable shares left under the “construction” header are Calgro, Raubex, Stefanutti and WBHO. (Strictly speaking Calgro isn’t actually a construction stock, it’s a developer, said Lucas.)
He said the performance of the sector also depended on economic growth. With no restoration of stability “and sanity” to economic policy, the listed construction sector could go to zero, said Lucas.